Entrepreneur Office Hours - Issue #39
How to price your startup's product and how to stop taking so many foolish risks
Questions about pricing and how to price a startup’s product have been popping up for me a lot lately. In fact, I’ve been getting so many of them, I figured I should probably write an article about it. You’ll find a link below.
You’ll also find an interview with Lane Merrifield, co-founder of Club Penguin. It was a virtual world with children that had 200+ million users pretending to be… umm… penguins. So that’s interesting, right?
Other things you’ll find below are a Q&A about revenue projections and some thoughts about whether entrepreneurs should be risk takers (spoiler alert: they absolutely shouldn’t be).
Don’t forget to like, subscribe, share, and do all the other “social” things you’re supposed to be doing. And, of course, keep sending your questions!
-Aaron
The Real Way to Price Your Startup’s Product
Every entrepreneur struggles with pricing, but it’s easier than you think, particularly once you realize you’re not the only one who’s struggling.
The 'Dragon' Who Reimagined Social Networking for Kids
Club Penguin was a virtual world that its founder, Lane Merrifield, also describes as a social network. However, depending on your age, you might have never heard of it. That's because Club Penguin was for children. And it was enormously popular, having over 200 million registered users around the world at its peak. On the new episode of Web Masters, hear how Lane built it and sold it Disney for $350 million.
Listen to his story now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
Can We Please Stop Describing Entrepreneurs as Risk-Takers?
Every time we call entrepreneurs "risk takers," we're keeping alive a myth that's killing thousands of startups. It's time to stop, and here's why.
Office Hours Q&A
———————
QUESTION:
I enjoyed your article about math and fundraising. Funny piece.
But from the entrepreneur’s perspective, I always feel like growth projections are a waste of time. How am I actually supposed to know how much money my company will be making 5 years from now? Startups are so unpredictable!
It seems like projections are just a wasteful exercise we do for investors but nobody really believes them. Am I missing something? Are they more valuable than I realize?
-Sean
------------------
I used to think the same thing. On top of that, you’re 100% correct... nobody believes projections. So why do them?
Turns out financial projections have nothing to do with accurately projecting the future. Instead, financial projections are a way for potential investors to make sure entrepreneurs are thinking correctly about the kinds of businesses they’re building.
Specifically, investors need to invest in certain types of businesses… the kinds of businesses that can create a significant (10x or more) return on their original investments. The only kinds of businesses that can do that are businesses with the potential for exponential growth.
In other words, your projections aren’t meant to show exactly how much money you’ll be making three, five, or 10 years from now. Your projections are meant to show you’re trying to build a company that’s going to grow exponentially.
Now that you know all this, here’s the tricky part… you have to avoid lying. By that I mean once you know investors want to see an exponential growth curve, you’re going to be tempted to show exponential growth in your projections regardless of whether or not that’s actually how your business will grow. After all, why waste time fundraising for a linear growth business if you know you’re not going to be able to raise capital?
Because of this, I always encourage entrepreneurs building financial projections to forget about investors. Instead, the financial projections are for you. Be as honest as you possibly can in projecting how your company might grow.
Once you’ve built your honest projections, what kind of company do you have? Is it a company with the potential to grow exponentially? If so, then you can consider venture capital. But if it’s not, don’t change your projections just to fit the venture model. Instead, accept that you’re not building a venture-style company and start figuring out other ways to grow it. I promise VC isn’t the only way to build a successful company.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!
